Clearwater Paper Corp

Clearwater Paper Corporation

Notes to Consolidated Financial Statements

Note 1 Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly, in all material respects, the consolidated financial position, results of operations, stockholders' equity and cash flows for us and our subsidiaries for the interim periods presented. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023. All dollar amounts are shown in millions, except per share.

Note 2 Recently Issued Accounting Standards

In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes—Improvements to Income Tax Disclosures (Topic 740), which requires enhanced disclosures primarily related to the rate reconciliation and disaggregation of income taxes paid. This ASU is effective for annual periods beginning after December 15, 2024, with early adoption permitted. We are currently evaluating the disclosure implications of this new standard.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures (Topic 280). This standard requires enhanced disclosures of segment expenses as well as additional information provided to the Chief Operating Decision Maker. This ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. The amendments in this ASU should be applied retrospectively to all prior periods presented in the financial statements, with early adoption permitted. We are currently evaluating the disclosure implications of this new standard.

Note 3 Receivables

Receivables consist of:

Note 4 Inventories

Inventories are stated at the lower of net realizable value or current cost using the average cost method and consist of:

Note 5 Property, plant and equipment

Property, plant and equipment consist of:

Note 6 Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

Included in "Accounts payable and accrued liabilities" are $10.3 million and $13.0 million related to capital expenditures that had not yet been paid as of March 31, 2024 and December 31, 2023.

We maintain a program with a financial institution to provide our vendors with an option to receive payment earlier than our standard payment terms. As of March 31, 2024 and December 31, 2023, $12.8 million and $14.7 million of outstanding obligations under this program were included in "Other" in the table above.

As of March 31, 2024 and December 31, 2023, unrecognized tax benefits of $26.0 million were included in "Other" in the table above.

Note 7 Income Taxes

For interim periods, accounting standards require that income tax expense be determined by applying the estimated annual effective income tax rate to year-to-date results, unless this method does not result in a reliable estimate of year-to-date income tax expense. Each period, the income tax accrual is adjusted to the latest estimate and the difference from the previously accrued year-to-date balance is adjusted to the current quarter.

For the quarter ended March 31, 2024, our income tax provision was $7.0 million as compared to $8.4 million in the same period in 2023. Our effective tax rate for the quarter ended March 31, 2024 varied from the U.S. federal statutory tax rate of 21.0% primarily due to the effects of state taxes, nondeductible compensation and interest related to uncertain tax provisions. Our effective tax rate for the quarter ended March 31, 2023 varied from the U.S. federal statutory tax rate of 21.0% primarily due to the effects of state taxes and nondeductible compensation.

Note 8 Debt

Long-term debt at the balance sheet dates consisted of:

In February 2024, we entered into a commitment letter to obtain financing from AgWest Farm Credit, PCA (“AgWest”), CoBank, FCB (“CoBank”) and Coöperatieve Rabobank U.A., New York Branch (“Rabobank”) in connection with the planned acquisition discussed at Note 16. In connection with the commitment, we paid an underwriting fee of $3.3 million, which is included in "Other assets, net" in the Consolidated Balance Sheets. As of March 31, 2024, no amounts were outstanding on these new facilities.

The fair value of our debt is included in the following table:

Note 9 Other Operating Charges

The major components of “Other operating charges, net” in the Consolidated Statements of Operations for the quarters ended March 31, 2024 and 2023 are reflected in the table below and described in the paragraphs following the table. These items are considered outside of our core operations.

During the first quarter of 2024, we recorded $7.9 million of expense in "Other operating charges, net." The main components of the expense include:

•expense of $4.2 million associated with acquisition and project-related activities (primarily legal and professional services) ;

•expense of $2.3 million associated with restructuring and integration activities (primarily professional services);

•loss of $0.2 million associated with the impairment of equipment and related spare parts no longer being used; and

•expense of $1.2 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

During the first quarter of 2023, we recorded $1.1 million of expense in "Other operating charges, net." The components of the expense include:

•loss of $1.1 million associated with the impairment of equipment and related spare parts no longer being used; and

•reversal of expense of $0.2 million relating to directors' equity-based compensation which is remeasured each period based upon changes in our stock price.

Note 10 Non-Operating Expense

The components of “Non-operating expense” in the Consolidated Statements of Operations for the quarters ended March 31, 2024 and 2023 are reflected in the table below:

Note 11 Retirement Plans and Postretirement Benefits

The following table details the components of net periodic cost of our company-sponsored pension and other postretirement employee benefit plans for the periods presented:

We record the service component of net periodic cost as part of "Cost of sales" and "Selling, general, and administrative expenses," while the non-service components of net periodic cost are recorded to "Other non-operating income" on our Consolidated Statements of Operations. For the quarter ended March 31, 2024, we recorded $0.6 million to "Cost of sales" and $0.1 million to "Selling, general, and administrative expenses." For the quarter ended March 31, 2023, we recorded $0.8 million to "Cost of sales" and $0.1 million to "Selling, general, and administrative expenses."

Note 12 Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss, net of tax, is comprised of the following:

Note 13 Stockholders' Equity

Common Stock Plans

We have stock-based compensation plans under which restricted stock awards and stock options are outstanding or granted subject to time or performance vesting requirements. As of March 31, 2024, approximately 0.6 million shares were available for future issuance under our current plan.

As of March 31, 2024, there was $21.3 million of total unrecognized compensation costs related to outstanding restricted stock unit awards.

During the quarter ended March 31, 2024, we granted 207,628 restricted stock units (time vesting) at an average grant date fair value of $37.97 per share and 160,057 restricted stock units (performance vesting) at an average grant date fair value of $40.18 per share.

Note 14 Earnings per Share

Basic income per share is based on the weighted-average number of shares of common stock outstanding. Diluted income per share is based upon the weighted-average number of shares of common stock outstanding plus all potentially dilutive securities that were assumed to be converted into common shares at the beginning of the period under the treasury stock method. This method requires the effect of potentially dilutive common stock equivalents be excluded from the calculation of diluted earnings per share for the periods in which net losses are reported because the effect is anti-dilutive.

Shares excluded from the computation of diluted earnings per share were 0.4 million for each of the quarters ended March 31, 2024, and 2023 as they were either antidilutive (not in-the-money) or the required performance conditions have not been met.

Note 15 Segment Information

We operate in two segments: Pulp and Paperboard and Consumer Products. Our business units have been aggregated into these two segments based upon the similarity of economic characteristics, customers and distribution methods. Our results of operations are summarized below for each of these segments separately. Segment information was prepared in accordance with the same accounting principles as those described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Net sales, classified by major products, were as follows:

Note 16 Pending Acquisition

On February 20, 2024, we entered into an Asset Purchase Agreement to acquire a paperboard mill and associated facilities, located in Augusta, Georgia from Graphic Packaging International, LLC for $700 million in cash, subject to certain adjustments for working capital. We expect to finance this transaction with cash on hand as well as through borrowings under our existing credit agreements as well as new financing. The closing of the Augusta Acquisition is subject to certain customary mutual closing conditions. This closing is expected to occur during the second quarter of 2024.